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On 1 September 2016 Withy King LLP merged with Royds LLP. The trading name for the merged firm is Royds Withy King. All content produced prior to this date will remain in the name of the firms pre-merger.

London’s booming tech sector under threat from EU VAT regulation

The latest estimates show that London’s tech sector has now attracted a record £620 million in venture capital investment in the first nine months of 2014, but the boom in the capital’s silicon revolution is being hampered by EU financial regulation.

Under current UK rules any VAT-registered business that sells anything overseas, but within the EU, must charge 20 per cent VAT.

But these rules have been exploited in the past by some industries, which sell from bases in jurisdictions like Luxembourg, where VAT is 15 per cent, despite the physical goods being delivered from warehouses in the UK.

However, from 1 January the rules are changing so that VAT will be charged on the location of the consumer.

Under the change H.M.Revenue and Customs (HMRC) will expect businesses to collect “two pieces of non-contradictory commercial evidence” to establish the location of a consumer.

For digital companies this evidence could include an IP address, the customer’s address or the location of the customer’s credit card.

However such evidence is often contradictory, as travellers or ex pats can all throw up anomalies on location depending on the web service they are using.

It is made even more difficult when using PayPal or Bitcoins which have no transparency when it comes to the customer’s location.

Even when a payment gateway can provide “commercial evidence”, a digital goods seller using more than one gateway has a major problem, needing different rules for each one when compiling VAT information.

The EU says it has come up with a solution in the form of a list of presumptions businesses can apply, which include rules on people paying for goods while travelling and expats. Failure to get it right however carries an unlimited fine for companies.

The VAT filing is also expected to become more burdensome as firms are forced to wade through the 75 different VAT rules of the EU’s 28 member states.

Companies can receive help through the HMRC’s “mini one stop shop”, but if a business is late with three or more VAT returns, then the return must be done directly in each of the 28 countries – creating yet more headaches for fledgling tech firms.

At Royds Solicitors we provide a comprehensive range of services aimed at meeting the demanding requirements of tech firms.